At first glance 2005 appears to have been another banner year for mutual holding company conversions.
Sixteen depositor-owned thrifts became mutual holding companies last year, just one less than in 2004, and more than the number of conversions in the previous four years combined. Moreover, those 16 thrifts raised $1.3 billion, the most ever in a single year, according to statistics compiled by BankAtlantic Bancorp Inc.'s Ryan Beck & Co.
But there are signs that interest in mutual holding company conversions is beginning to wane. Only three of the conversions took place after July 15, and investors and analysts who keep tabs on them say that only a handful are in the pipeline.
They also predict that converting thrifts might have trouble attracting investors. Though most of last year's deals were oversubscribed, analysts say that investors have grown more cautious as interest rates and thrift values have risen, and the stock prices of some recently converted thrifts have barely budged - or have fallen.
As Theodore Kovaleff, an analyst at Sky Capital LLC in New York and an investor in mutual holding companies, put it, "Nobody wants a stock that comes out at $10 and immediately starts trading at $9."
Mutual holding companies are owned primarily by the issuing thrifts, but they can sell up to 49% of their stock to the public. Some professional investors are leery because the holding companies retain so much control and, because of their complex structure, few are ever sold. But other investors like mutual holding companies because they often pay generous dividends.
Still, for most thrifts going public these days, the mutual holding company structure is clearly more attractive than a standard conversion. The reason, thrift executives and analysts say, is that at current appraisal values, thrifts that sell 100% of their stock to the public would raise more capital than they would want or need and still achieve respectable returns on equity.
Collyn Gilbert, an analyst at Ryan Beck, said that a full conversion can be a "dangerous weapon" for converting thrifts, especially if they lack the management depth or the product mix needed to deploy the capital quickly.
Of the 41 thrifts that went public in 2004 and 2005, only eight chose to fully convert and the rest became mutual holding companies, according to Ryan Beck. By contrast, in the 10 years prior, less than one-fifth of the more than 400 thrifts that went public opted for the mutual holding company structure.
Magyar Bank in New Brunswick, N.J., closed its public offering last week and expects to complete its mutual holding company conversion by mid-January. Elizabeth Hance, its president and chief executive, said Tuesday that a partial conversion would give the $360 million-asset thrift more control over its capital.
"When you're an all-stock company you are under pressure to immediately deploy that capital and, frankly, a bank our size cannot deploy it right away," Ms. Hance said. The thrift is looking to raise about $23 million and plans to use the proceeds to beef up its commercial and construction lending, she added.
United Financial Corp. in Springfield, Mass., was among the larger mutual thrifts to convert to a mutual holding company in 2005. The $900 million-asset company raised about $77 million selling roughly 46% of its stock to the public and plans to use the proceeds to hire more commercial lenders, fund a branch expansion, and perhaps make acquisitions, said president and CEO Richard Collins.
But if it had sold 100% of its stock, the company would have raised far more capital "than we could profitably put to use," Mr. Collins said.
Even as a mutual holding company, United is, at the moment, overcapitalized. Before its conversion in June, the company had a capital-to-assets ratio in the 7% range and return on equity of around 10%. At Sept. 30, with a capital level above 15%, United reported returns on equity and assets below zero.
It is a similar story at Heritage Financial Group in Albany, Ga. The $360 million-asset company sold just 30% of its stock to the public when it converted to a mutual holding company in June, and now its capital-to-assets ratio is above 19%. O. Leonard Dormeny, Heritage's president and CEO, said that it hopes to put much of the $34 million it raised to use in the next 12 to 24 months, but, in the meantime, investors should expect lower returns on equity.
Despite their capital issues, United's and Heritage's stocks have performed reasonably well since they went public; both are trading at roughly 15% above the prices of their initial public offerings.
The stock prices of some other recently converted thrifts have not held up as well. Home Federal Bancorp Inc. of Shreveport, La., BV Financial Inc. of Baltimore, and Georgetown Bancorp Inc. of Massachusetts all became mutual holding companies in January 2005, and their stocks traded below their IPO prices for much of the year.
Analysts say that one reason some thrifts' stocks are "under water," as one of them put it, is investor concern about how quickly they can put capital to use.
Another explanation, though, is that many investors believe the stocks were overvalued in the first place.
Before going public, a thrift must undergo an appraisal process to determine its worth. The higher the appraisal, the more capital it must raise, and the less upside there is for investors, Mr. Kovaleff said.
In 2002, for example, the average converting thrift was appraised at about 65% of its tangible book value. In 2005, appraisals came in at an average of 85%, according to Ryan Beck statistics.
Appraisals are done by independent firms and reviewed by regulators and based largely on the values of companies that previously converted. While some appraisal values are justified, Mr. Kovaleff said he believes that some smaller thrifts are being forced to raise more too much money, thus scaring away some investors.
Mr. Kovaleff added that past performance dictates future results and that the pipeline of mutual holding company conversions is relatively dry "because the records of recent ones have been so poor."
Rising interest rates, too, could be dulling mutuals' appetite for going public. Home mortgages remain the thrift industry's bread and butter, and as demand for new homes slows, so too will demand for capital.
That demand has been especially strong for "a long time, but I don't think we're going to see that momentum going forward," Ryan Beck's Ms. Gilbert said. "It's been such a hot market that it is inevitably going to slow."
